You’ve bested the competition, a seller’s accepted your bid to buy their advisory practice, butdo you really know what you’re getting?Is there a way to ensure that you’re notoverpaying or that there won’t be any bigand unpleasant surprises after the sale?
UNDERSTAND THE SELLER’S
As always, it pays to understand the seller’s psychology. While it’s rare for a sellerto intentionally conceal critical blemish-es in their practice, it’s important to recognize that they usually don’t see them.
This is because they really care abouttheir practice and often can’t see any ofits flaws or imperfections, according toDavid Grau, Jr., founder and CEO of theSuccession Resource Group.
“They love their business, it’s theirbaby, and no one wants to think theyhave an ugly baby,” Grau explained. Also,keep in mind that you as the buyer areresponsible for conducting the due diligence to ferret out any and all issues.
CHECK OUT DIAMONDS IN THE ROUGHBuyers also should recognize that manysellers may have begun slowing downyears before they decide to sell andhaven’t been growing their practices.
“They have been coasting on fee-basedrevenues generated by a cadre of loyalclients and simply don’t need to workas hard or as much,” Grau explained.“[When] ready to retire, their businessdevelopment has simply become playinggolf with their best clients.
Still, many seemingly stagnant practices have tremendous potential forgrowth, and number crunching alonemay not uncover these opportunities.
Buyers are looking for the “embedded
opportunity” in a prospective advisory
firm, which is tough to define until the
buyer has started meeting with clients.
A firm with regular client appreciationevents and a loyal, enthusiastic clientbase can be advantageous. For instance,well-heeled prospects that clients havebrought to past events but the firm didn’tfollow up with make for good contacts.
In other words, there’s great potentialbusiness here that hasn’t yet been fullytapped by the seller.
HAVE A SERIOUS DUE DILIGENCE
Once a buyer and seller have agreedupon a sale price, the buyer typically hasa few weeks to take a deep dive into thenitty-gritty of the seller’s practice.
A prudent buyer usually will need toengage outside experts to help him scrutinize the practice. The process is akinto hiring a home inspector to review apotential real estate purchase, says Grau.
During this period, a prospectivebuyer may hire an accountant or investment banker to help ensure that nostone is left unturned.
Even transactions between friends
require serious due diligence, Grau
adds, emphasizing that buyers shouldn’t
take anything at face value. These are
small businesses, and running a small
business can be messy at times.
Others agree. “There’s no substitutefor time,” said Michael Wunderli, managing director of the investment bankingfirm Echelon Partners.
A hands-on process of wide-rangingconversations with advisors and staffat a prospective firm is a must. “This isthe biggest insurance against getting alemon,” explained Wunderli.
DIG INTO THREE AREAS
Also, there are three key areas that purchasers need to meticulously vet: firmfinances, the structure of the firm, andthe nature of advisor and client relationships, said Wunderli.
Look at the quality of a firm’s earnings and assess the profitability of itscore wealth management business. Areearnings being generated by a large non-repeatable transaction, like the sale ofprivate placements or old computerequipment? Or are they tied to ongoingfee-based revenue?
Acquirers need to be cognizant of thestructure of the seller’s firm,too. Whoowns the client relationships? “Figuringout if the clients will stay is 90% of it,”according to Wunderli.
A larger firm with client relationshipsthat it developed and regularly contactsvia a team of product specialists hasmore of a lock on its clients than a firmwith multiple advisors who source theirown clients and devise their own investment programs.
Both types of advisors should be givenbackend retention bonuses and shouldoptimally be excited about staying onafter the sale, because of the new firm’sexpanded platform capabilities.
How to Buy the Right Practice — Not a Lemon
Sizing up a potential purchase requires a serious commitment of time and focus.